Before jumping in with both feet, it is better to look at the disadvantages of this type of agreement:
- Lack of a Proper System: There is no proper process in place to vet individual local sponsors in the UAE. Furthermore, once you’ve found someone that you feel you can trust, and before the company can start trading, your local sponsor must review the agreement and sign the paperwork. This doesn’t always run like clockwork. UAE tax and law experts have noted this can be challenging.
- Availability of Sponsors: Since much of the setup process – and potentially, some of the ensuing business decisions – rely on the local sponsor, their availability is crucial to your success. A lot of Emiratis are always on the road (or, indeed, in the air), whether for work or pleasure. These frequent absences may become an issue and negatively impact operational efficiency.
- Interference with the Company: What if the local sponsor starts to meddle with how you run the company? This explains why local majority shareholders may change their minds about how involved they wish to be as they develop stronger feelings about exercising a leadership position.
- Early Retirement or Death of a Local Sponsor: In such cases, an individual sponsor’s shares are transferred to their legal heirs. This can be a troubling scenario: if the new partner does not want to continue being your company’s sponsor, you’ll have to begin the sponsorship process again. More generally, there are concerns about what will happen to the agreement you made with the original sponsor and whether the heirs will honour it.
- Legal Clarity: Some entrepreneurs make the mistake of believing individual sponsors cannot legally interfere. However, Article 91 of the Federal Law on Commercial Companies grants sponsors ‘all the rights associated with the description of the partners’, and they may have the right to significant control over the company. More troubling, some individual sponsors have been known to attempt to claim ownership.
Corporate sponsorship is similar to individual sponsorship. The corporate sponsor is a UAE national company and not an individual UAE citizen. The corporate sponsor holds a 51% stake in the business. The corporate sponsor receives a set fee or profit share to let the foreign investor run the company with full control. Foreign entrepreneurs also maintain 100% of the profits from the business along with full control. The process of corporate sponsorship is less risky as it is completely clear and structured from start to finish. It provides entrepreneurs with more security and legal protection by ensuring agreements are reviewed by a first-tier legal counsel and terms set from day one. Dealing with individual sponsors can create ownership problems if the partner passes away or retires early. To mitigate this risk, you need ‘succession planning’ or a legally binding plan in place. But with a corporate sponsor, you don’t need any succession planning. This type of sponsorship provides you with the support of an entire corporate team rather than just one individual. One of the biggest advantages of a corporate sponsor is that it will never interfere with the business.
Corporate sponsorship comes with a bunch of benefits that can help you in deciding which route to opt for. Some advantages are mentioned below:
- Zero Interference with Full Financial Benefits: Without a doubt, one of the greatest advantages is that your corporate sponsor will never interfere with the business. Additionally, entrepreneurs maintain 100% of the financial benefits from the business along with full control.
- Better Legal Protection and Regulations: Entering into a legal agreement with a local partner you don’t know well can be risky business unless you have the legal protection you need. Corporate sponsorship deals provide entrepreneurs with more security. Most reputable providers of such services ensure agreements are overseen by first-tier legal counsel and each term will be as clear as day from the offset.
- Timely Document Completion: While it can be difficult to establish time-horizons when dealing with individual sponsors, especially if they travel a lot, a corporate sponsor is more structured. There’s quite a bit of documentation required by the process, from visas to bank references, and working with a corporate sponsor can keep the completion period short and painless.
- No Need for Succession Planning: As mentioned, dealing with individual sponsors can present ownership problems if a partner passes away or retires early. One way that entrepreneurs opt to mitigate this risk is through ‘succession planning,’ or having a legally binding plan in place. However, this can be costly both in terms of time and money. When working with a corporate entity, you don’t need to worry about succession planning.
It may sound too good to be true, so let’s also acknowledge a few downsides of a corporate sponsor.
- Relatively Expensive: You would not be alone in assuming that since corporate sponsorship provides such a straightforward route, it must be costly. But that’s not necessarily the case. With individual sponsors, some entrepreneurs report being beset by hidden costs and unexpected fees once they are tied into an agreement. With the corporate route, you get transparency and clarity from the start.
- Extensive Paperwork: Nobody likes paperwork – that’s a given. When it comes to corporate sponsorship, there’s just one additional document you have to deal with – and it further protects the business’ shareholder rights. The document is also drafted by top-tier legal advisors to ensure that every aspect of the agreement is sound and easy to understand.
- Issue of Credibility: Integrity should be at the heart of any corporate sponsor. After all, they will be the anchor securing your business ventures to the UAE mainland. While most companies are reliable and trustworthy, don’t take this for granted. Due diligence is essential: research the credibility of any sponsor.
- Customer Service May Vary: Before entering into an agreement, you need to know that you can rely on a company’s level of service.
What’s the Verdict?
There’s no single ‘right path’ – it varies from business to business. In cases where entrepreneurs already know a person with a strong standing in the UAE, individual sponsorship may be the best move. However, if you want to avoid the uncertainties associated with the individual route, you may opt for corporate sponsorship as an easier and safer choice. Talking this through with a specialist in setting up UAE businesses is a great step towards ensuring you pick the right option.
Riz and Mona Consultancy is dedicated to helping clients open a company in the UAE, providing advice and assistance with every aspect of the company formation. To set up a consultation with our company formation experts, feel free to contact us.
